PralineYum uses standard costing to produce a particularly popular type of candy. PralineYum's President, Tim Macon was unhappy after reviewing the income statements for the first three years of business. He said, "I was told by our accountantsand in fact, I have memorizedthat our breakeven volume is 29,000 units. I was happy that we reached that sales goal in each of our first two years. But, here's the strange thing: In our first year, we sold 29,000 units and indeed we broke even. Then, in our second year we sold the same volume and had a signficant, positive operating income. I didn't complain, of course. . . but here's the bad part. In our third year, we sold 10% more candy, but our operating income dropped by nearly 90% from what it was in the second year! We didn't change our selling price or cost structure over the past three years and have no price, efficiency, or spending variances . . . so what's going on?!"

Absorption Costing	2016	2017	2018
Sales (units)	29,000	29,000	31,900
Revenues	$2,233,000	$2,233,000	$2,456,300
Cost of goods sold
Beginning inventory	0	0	203,000
Production	2,030,000	2,233,000	2,030,000
Available for sale	2,030,000	2,233,000	2,233,000
Deduct ending inventory	0	(203,000)	0
Adjustment for production-volume variance	0	(162,400)	0
Cost of goods sold	2,030,000	1,867,600	2,233,000
Gross margin	203,000	365,400	223,300
Selling and administrative expenses (all fixed)	203,000	203,000	203,000
Operating income	$0	$162,400	20,300
Beginning inventory	0	0	2,900
Production (units)	29,000	31,900	29,000
Sales (units)	29,000	29,000	31,900
Ending inventory	0	2,900	0
Variable manufacturing cost per unit	$14	$14	$14
Fixed manufacturing overhead costs	$1,624,000	$1,624,000	$1,624,000
Fixed manuf. costs allocated per unit produced	$56	$56	$56

1.	What denominator level is PralineYumPralineYum using to allocate fixed manufacturing costs to the candy? How is PralineYumPralineYum disposing of any favorable or unfavorable production-volume variance at the end of the year? Explain your answer briefly.
2.	How did PralineYumPralineYum's accountants arrive at the breakeven volume of 29 comma 00029,000 units?
3.	Prepare a variable costing-based income statement for each year. Explain the variation in the variable costing operating income for each year based on contribution margin per unit and sales volume.
4.	Reconcile the operating incomes under variable costing and absorption costing for each year, and use this information to explain to TimTim MaconMacon the positive operating income in 20172017 and the drop in operating income in 20182018.